Pres­sures emerg­ing

Com­bi­na­tion of SA leg­is­la­tion and credit cri­sis makes for chal­leng­ing times

Finweek English Edition - - Openers -

EF­FECTS OF HIGHER COSTS of fund­ing glob­ally have started to show on the bot­tom line of mi­cro fi­nancier Blue Fi­nan­cial Ser­vices. In South Africa the prob­lem was ex­ac­er­bated by the in­tro­duc­tion of the Na­tional Credit Act (NCA), as is ev­i­dent from the com­pany’s re­sults at the in­terim pe­riod to Au­gust 2008.

Blue’s in­ter­est in­come jumped to R187,6m over that pe­riod, al­most a full R100m more than the R87,9m achieved at the cor­re­spond­ing pe­riod last year. In the six months to Au­gust 2007, Blue spent R15,8m on in­ter­est, which jumped to R61,4m this Au­gust. What that means is Blue spent nearly 33c on in­ter­est for ev­ery rand it col­lected from its own debtors against 18c/R1 at the same time last year. Net in­ter­est in­come of R125,9m in Au­gust was 67% of rev­enue, against 81,9% last Au­gust.

In Blue’s big­gest mar­ket – SA – the cost of fund­ing was even worse than in the 11 other coun­tries in which it op­er­ates. In­ter­est in­come was R72,5m and in­ter­est ex­penses came in at R44,6m – 61,4% of rev­enue. A com­par­i­son be­tween Botswana (34%) and Zam­bia (24, 5%) clearly shows the SA sit­u­a­tion was a di­rect re­sult of the cap in in­ter­est charges in­tro­duced by the NCA.

Blue CE Dave van Niek­erk ad­mit­ted as much in an in­ter­view. “We’d have done bet­ter if there was no NCA,” he says. SA saw the low­est growth in loan ad­vances at 65%, against the group’s 236% – which took the loan book value to R876m. Fund­ing li­a­bil­i­ties in­creased by 162%, from R211,2m to R553,6m as at Au­gust.

To counter the ef­fects of the NCA in SA (which Van Niek­erk read­ily ad­mits “played a very im­por­tant role buffer­ing the coun­try against the global fi­nan­cial cri­sis”) Blue is looking at the con­clu­sion of its ac­qui­si­tion of fel­low mi­cro-lender Credit U. It’s pay­ing 240c/share for the com­pany – an earn­ings mul­ti­ple of 6,5 times. That will help achieve economies of scale, as it will in­crease Blue’s branch net­work by 92 out­lets and add R280m to its debtors book. That should also lower its cost of credit on the part of Credit U, as it cur­rently bor­rows at prime plus 6% in­ter­est against Blue’s prime mi­nus 1%.

How­ever, it’s not only the ef­fects of the NCA that Blue has to worry about. Higher in­ter­est rates in SA are also putting pres­sure on house­holds’ abil­ity to ser­vice their debts, putting up­ward pres­sure on bad debts. Whereas in Au­gust 2007 there was a R2,7m credit on the “im­pair­ment of loan ad­vances” this time round the fig­ure de­te­ri­o­rated to more than R19m – 10,21% of the rev­enue but 2% of the ad­vances book. Van Niek­erk says the group has bud­geted for bad debts of 6,3% and 7,4% for its SA unit. The R4,8m im­pair­ment charge (pre­vi­ously a credit of R4,5m) for SA, ac­counts for 25% of the group in­terim im­pair­ment fig­ure.

How­ever, Blue fi­nance di­rec­tor Grant Chit­ten­den says the com­pany’s ar­rest­ing the sit­u­a­tion. “We re­ject about 40% of credit ap­pli­cants and have im­proved on ar­rears col­lec­tions in the last six months,” he says. Blue’s bad debts have come down from 9,2% of rev­enue in Fe­bru­ary to the cur­rent 6,69% in the SA unit. The rest of Africa has no prob­lem with bad debts, as de­duc­tions oc­cur at source.

What’s also go­ing to be a chal­lenge is the cur­rent global credit cri­sis. “We’re not af­fected by the cri­sis ex­cept by the price of credit. It’s go­ing to be tough rais­ing funds cheaply in the cur­rent fi­nan­cial mar­kets,” says Van Niek­erk. “Fund­ing is go­ing to be more ex­pen­sive.”

Dave van Niek­erk

Grant Chit­ten­den

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